Preventing recessions: the Dieli model.

The Dieli model is a predictor of a coming recession. It uses four numbers and arrives at a final number. When the final number drops below 200, a recession is expected within 9 months. The parameters used in arriving at the final number are expressed as basis points: meaning that percentage values are multiplied by 100. Thus, a Fed Funds rate of 0.13% becomes 13, while an unemployment rate of 8.10% becomes 810 basis points.

This is the way the Dieli number is calculated:

 

Long Treasury yield  (240)

- Fed Funds Rate (13)

_________________________

Yields the Financial spread of 227.

 

Inflation rate   (170)

-Unemployment    (810)

__________________________

This yields the Real spread

 

Dieli number = Financial Spread- Real Spread.

The current example is (240-13) - (170-810) =867

 

 

 

 

 

The Author* states that because the Dieli number is way in excess of 200,  we are not heading for a recession. There is a serious problem with the graph though. The Dieli number (i.e. the peak) is twice as high as we would expect. Since, the Treasury yield and the Fed Fund Rate are known constants, either the inflation or the unemployment must be wrong. We can trust the unemployment number more, because inflation ignores the price of food and gasoline. If inflation was closer to 8% then the Dieli number may be near the 200 magic number.What this tells us is that an increae in inflation will now put us into a recession by the end of the year. 

 

*This post is based on an article by a Mr Miller in Saturday's issue of Seeking Alpha. Since, Blogger made changes, several editings were needed because the spelling function was disabled.